President Buhari signed the Finance Act (No.2) 2020 (FA2 2020)(1) into law on 31st December 2020 – an improvement over the signing of FA2 2020’s predecessor legislation, in January 2020.(2) Commendably, we are back to the days of related tax legislation being enacted alongside the annual Appropriation Act in order to keep the tax system current and enable traction, cum leverage, for meeting budgetary objectives. It is particularly heartwarming that the Buhari administration is keeping its promise, made in 2019, to enact the Finance Act annually. Between 1999 and 2019, the practice basically fell into disuse, not to talk of many tax legislative initiatives that did not see the light of day.(3) Under the military, the Budget Speech was usually followed/accompanied by the Finance (Miscellaneous Taxation Provisions) Decree (FMTPD) that gave fillip to the budgetary policies of the relevant year, through amendments to extant tax legislation.(4)
The FA2 2020 is arguably the widest scope and most far ranging tax amendment legislation in recent history, if not overall in Nigerian tax history. Embodying 81 sections, it amends not only the ‘usual suspects’(5) – but also strictly non-tax but budget impacting legislation, like the Public Procurement Act(6) (PPA) and the Fiscal Responsibility Act(7) (FRA). Even the Companies and Allied Matters Act 2020(8) (enacted in August 2020), was not left out.(9) Expectedly, many provisions formalise long desired amendments, introduce new tax incentives or further refine them, whilst also reviewing sanctions for breach of tax laws.(10) But for a brief reference to gas utilisation incentives (amending section 39 CITA), FA2 2020 does not focus on the petroleum sector, presumably because of the comprehensive horizon of the Petroleum Industry Bill 2020 (PIB), currently under consideration by the National Assembly.(11)
This article discusses generally, and on a sectoral-agnostic basis, the Nigerian tax regulatory implications of FA2 2020 for non-residents (NRs), whether corporates or individuals, as respectively headlined below.
- Capital Gains Tax Act (CGTA)
- Bi-annual CGT Returns Upon Disposal of Chargeable Assets: NRCs that dispose chargeable assets are required to compute, file CGT self-assessment returns and pay the relevant CGT not later that 30th June and 31st December for chargeable assets disposed during the periods: section 2 FA2 2020 (inserting new section 2(4) CGTA).
- Location of Ship or Aircraft Used in International Traffic: Per the amended section 24(f) CGTA,(12) such vessels used in international traffic are no longer to be considered as located in Nigeria, if the owner is non-resident. Likewise, rights or interest in or over such vessel, is not considered located in Nigeria if the holder of such right is also an NR.
- Companies Income Tax Act (CITA) Amendments
- Foreign Service Provider’s Fees: Section 7 amends section 13(2)(e) CITA (as first amended by FA1 2020) by effecting a typographical correction in the proviso. The tax treatment of foreign service providers to Nigerian clients (no further tax exposure after withholding tax (WHT) deduction on the NR service provider’s fees) – remains consistent with the general trend that Nigerian source investment income (on dividends, interest, royalties or rentals) is ‘franked’ to NRs.
- Non-Resident Companies (NRCs) to File Tax Returns with Audited Accounts: Section 16 FA2 2020 (amending section 55 CITA) now mandates NRCs deriving profit from Nigeria to file their actual accounts, effectively doing away with the “deemed profit” basis of assessment that the FIRS utilised whenever NRCs failed, or were unwilling, for whatever reason, to submit actual data of their Nigerian operations.(13) By the new section 55(1A) CITA, such NRCs are required to submit, with their tax returns:
“…(a) the company’s full audited financial statements and the financial statement of the Nigerian operations, attested by an independent qualified or certified accountant in Nigeria; (b) tax computation schedules based on the profits attributable to its Nigerian operations; (c) a true and correct statement in writing, containing the amount of profits from each and every source in Nigeria; and (d) duly completed Companies Income Tax Self-Assessment Forms…”
However, where the non-resident company “only earns income on which withholding tax is the final tax…the obligation to file a tax return in the manner prescribed shall not apply to such company in that year of assessment”.(14) This is consistent with the earlier referenced section 7 FA2 2020. It appears that limiting the carve-outs in this way, is meant to send a serious message that the FIRS henceforth, means business, since FIRS ‘hands has now been forced’.(15)
Because section 14 CITA (tax regime for NR shipping and aviation companies) is still extant, but section 8 FA2 2020 excludes “income from leasing, containers, non-freight operations and any other incidental income liable to tax under section 9 (CITA)” from being subject to section 14 CITA, does it mean that income from the listed operations will never be subject to tax on deemed basis? This because sections 14 and 15 CITA arguably still recognises the possibility of deemed basis for shipping, aviation and cable companies.(16) It appears that some clarity would still be needed, given propriety of questions of implied repeal of some seemingly conflicting CITA provisions.
One way of reconciling seeming conflict is to say the new section 55 CITA does not prevent the FIRS in deserving cases, from still issuing best of judgment assessments, a la section 65(2) CITA, notwithstanding that NRCs filed audited accounts of their Nigerian operations.(17) Another is that pre-FA2 2020 section 55 CITA amendment, the Courts have held that any conflict would be resolved in favour of section 30(1) CITA, given its ‘supremacy intent’. (18)
Clearly, NR shareholders/parent companies of Nigerian subsidiaries (qua equity/debt investors only), are not the focus of these provisions. NRCs without Nigerian subsidiaries working through agents,(19) or engaged in ‘tripartite’ or split contracts where they provide offshore elements of turnkey contracts alongside a local entity for the mutual Nigerian client,(20) will need to consider the impact of these provisions on their business/contracting model.(21)
With this provision, the issue of FIRS insisting on filing of actual figures vis a vis recurrent shifting deadlines thereof, will no longer be applicable; everyone’s hands has as it were, been forced and default by non-residents will attract the requisite sanctions.(22)
- Personal Income Tax Act (PITA) Amendments
The new section 6A PITA (vide section 25 FA2 2020) prescribes that “where an individual, executor, or trustee outside Nigeria carries on a trade or business that comprises the furnishing of technical, management, consultancy or professional services to a person in Nigeria, the gains or profits of the trade or business shall be deemed to be derived from and taxable in Nigeria to the extent that the individual, executor or trustee has significant economic presence in Nigeria.” See section 6A(1). Its proviso that WHT on such income shall be the final tax thereon, is akin to the new section 13(2)(e) CITA proviso. Section 6A empowers the Minister to determine by Order, “what constitutes the significant economic presence of a non-resident individual, executor or trustee.” Presumably, this will, with necessary modifications, tow the lines of the CIT Significant Economic Presence Order 2020 issued pursuant to FA1 2020 CITA amendments.(23)
- Tertiary Education Trust Fund (Establishment, Etc) Act
NRCs continue to be exempt from the 2% TETFund Tax on their assessable profits since they are not “registered in Nigeria”.
- Customs & Excise Tariff, Etc (Consolidation) Act (CETCA)
- Imports Now Subject to Excise Duties: By virtue of the new section 21(1) CETCA (vide section 37 FA2 2020), “goods imported” are now also subject to excise duties – alongside locally manufactured ones. Customarily, imports were only subject to customs (import) duty, and not excise.(24) The provision is so drastic that one wonders if it is a draftsman’s error? This writer thinks not, because the new section 21(1) CETCA starts with “Goods imported and those manufactured in Nigeria”(25) It would appear that reduction in import duties of motor vehicles, buses and trucks (see below) may now be compensated or ‘clawed back’ by the excise duties on such “goods”,(26) since vehicles etc, are “goods” for purposes of CETCA?(27)
- Value Added Tax Act (VATA)
- Effective Date of 7.5% Rate: FA1 2020 did not specify the effective date of the new VAT rate, a measure that was consummated by Ministerial Order to be 1st February 2020 (for monthly VAT filings due by 21st March 2020). Although the 7.5% rate has in practice been applicable thenceforth, section 42 FA2 2020 has now made assurance doubly sure, by enshrining same in VATA’s new section 4.
- Taxable Goods and Services: The new section 2 VATA (vide section 40 FA2 2020) further attempts to build on the FA1 2020 ‘clarity amendments’ in defining “taxable goods and services”. Thus, by section 2(3)(b), taxable supply of services are deemed to take place in Nigeria if: (i) “the service is rendered in Nigeria by a person physically present in Nigeria at the time of providing the service”; (ii) “the service is provided to and consumed by a person in Nigeria, regardless of whether the service is rendered within or outside Nigeria or whether or not the legal or contractual obligation to render such service rests on person within or outside Nigeria”; or (iii) “the service is connected with existing immovable property …where the property is located in Nigeria.”
By section 2(3)(c), VAT is applicable to transactions “in respect of an incorporeal”, if: (i) the exploitation of the right is made by a person in Nigeria; (ii) the right is registered in Nigeria, assigned to or by a person in Nigeria, regardless of whether the payment for its exploitation is made within or outside Nigeria; or (iii) the incorporeal is connected with a tangible or immovable asset located in Nigeria.”
- Definition of “Goods” and “Services”: Section 44(b) FA2 2020 amends section 46 VATA by inserting new definitions as hereinafter appearing. “ ‘Goods’, for the purposes of this Act, means all forms of tangible properties, movable or immovable, but does not include land and building, money or securities;” whilst “ ‘services’ means: (a) anything other than goods, or services provided under a contract of employment; and (b) includes any intangible or incorporeal (product, asset or property) over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another, excluding interest in land and building, money or security.” These clarification definitions, continuing from where FA1 2020’s clarification definitions stopped, will help to further obviate litigation, going forward.(28)
- Time of Supply: The new section 2A VATA also attempts to ‘tighten’ the tests for applicability of VAT, affirming the intent to deal with substance, rather than form, of transactions. Thus, taxable supply is deemed to occur at the earliest of: (a) issuance of invoice or receipt; or (b) when payment for the supply is due, or received: section 2A(1). Section 2A(2) imposes ‘the test of access’ in deeming taxable supplies between related parties or “connected persons”. Accordingly, it is immaterial that invoices are not issued – once the goods are removed or made available to the recipient, relevant service is furnished or the incorporeal becomes available for the use of the recipient, then a taxable supply has occurred.
Section 2A(3) goes on to provide deemed timing of taxable supplies in respect of periodic payments in terms of “successive supplies” for each payment instalment, being the earlier of when same is due or received or invoice issued therefor. This applies to milestone based payments of construction, installation, manufacturing type contracts. Finally, for goods supplied under an instalment credit agreement, taxable supply occurs upon the earlier of: delivery or when the supplier receives payment.
- Registration by Non-Resident Companies: VATA’s new section 10 (vide section 43 FA2 2020) requires NRCs that makes taxable supply of goods and services to Nigeria to register with the FIRS and obtain Tax Identification Number (TIN), which shall be reflected on their invoices; whilst the resident recipient (client) shall withhold and remit the VAT to the FIRS in the currency of the transaction. NRCs may also appoint local representatives to help them with their tax compliance obligations.(29) Section 10(5) concludes the section by stating that the FIRS “may issue a guideline for the purposes of giving effect to the provisions of this section.” Presumably such guideline, (if and when issued), will not be an attempt to vary the statutory provisions, as such would clearly be ultra vires the FIRS.
Expectedly, the FIRS may not be as concerned that an NRC that does occasional, (and maybe insignificant), taxable supply transaction with a Nigerian resident, is not registered and does not have TIN than for the relevant VAT to get remitted to FIRS anyway. Another point relates to the informal sector – VAT on taxable supplies (especially services) to individuals may still escape, because the bulk of the enforcement focus is on businesses, rather than individuals. For example, individuals (in their personal capacities), do not have VAT reporting obligations.
- VAT Deduction at Source: Section 10(2) VATA (as amended by section 36 FA1 2020), which authorises FIRS to direct operators in the oil and gas sector to deduct and remit VAT directly to the FIRS has now been repealed by virtue of non-inclusion in the new section 10 VATA. This omission is curious, given the time value of money on substantial sectoral VAT involving local counterparties, erstwhile directly remittable to the FIRS. Does this mean that once the vendor is a resident, Nigerian clients will no longer deduct and remit VAT on oil and gas invoices? The omission is not an issue for NRCs, since the requirement for residents to deduct and remit VAT on their invoices (irrespective of sector), still applies. We believe that the FIRS will find some other statutory basis to continue insisting on the local counterparties’ sectoral VAT remittance, given that the practice has become entrenched, with beneficial impact, since it was instituted.(30)
- Curiously, the new section 10 VATA has omitted the previous provision that if a non-resident does not include VAT on its invoice to the resident recipient of taxable supply, the latter is obliged to self-account for the VAT and remit same to the FIRS. It is respectfully submitted that such firm obligation ought to have been retained to make assurance doubly sure – it is not enough that NRs are obliged, by section 10(2) VATA to include VAT on their invoices for taxable supplies. FIRS’ attempts to cover the gap by utilising section 10(3) to appoint the resident recipient as an agent for VAT collection purposes will not be as efficient as clear obligation on such recipients to self-account where the NR fails to include VAT in their invoices.
- Stamp Duties Act (SDA)
- There are no significant SDA changes of interest to NRs. It is noteworthy that vide section 46 FA2 2020, amending section 2 SDA), the Federal Government (FG) has re-affirmed the use of adhesive stamps issued by the Nigerian Postal Service (NIPOST) to denote duties in appropriate cases. (31)
- FIRS (Establishment) Act FIRSEA
- International Cooperation: The relevant FA2 2020 amendments to the FIRSEA with cross-border implications are considered below. Per the new section 8(1)(t) FIRSEA (courtesy of section 49 FA2 2020), the FIRS “may provide assistance in the collection of revenue claims or any other administrative assistance in tax matters with respect to any agreement or arrangement made between the (FG) and the Government of any country or other persons or bodies as may be deemed necessary in that regard.”(32) These are followed by new section 25(3-5) FIRSEA, (vide section 51 FA2 2020). Section 25(3) and (5) evince strong intention to reverse the trend of losing potential tax revenues from international digital transactions.
The former entitles the FIRS to “deploy any proprietary or third party payment, processing or other digital platform or application to collect and remit taxes due on international transactions in the supply of digital services to and from a person in Nigeria, in the case of transactions carried out through remote, digital, electronic or other such platform.” Per the latter, (which is a flip of section 8(1)(t) FIRSEA), the FIRS “may receive assistance in the collection of revenue claims or any other administrative assistance in tax matters with respect to any agreement or arrangement made between the (Federal Government) and the Government of any country or other persons or bodies as may be deemed necessary in that regard.”
- Confidentiality of Tax Payer Information: By virtue of new sections 39(1) and 50(5), the confidentiality of taxpayer information is guaranteed, but such shall not prevent disclosure to authorised foreign officials in furtherance of any cooperation agreement with any other country, government or tax authority.(33) Section 69 (vide section 56(a) FA2 2020), comprehensively defines taxpayer information to include information: (i) received or generated by the FIRS pursuant to extant legislation; (ii) in any form received, accessed or produced by the FIRS pursuant to any exchange of information agreement or arrangement; and “(iii) written or electronic documents, returns, assessments, lists and copies of such lists relating to profits or items of profits of any person or to such matter which forms the basis of any agreement or arrangement with any country, government or tax authority”. Presumably, these would operate on the basis of reciprocity – the foreign counterparts will also have confidentiality carve-outs to enable them supply information to FIRS when necessary.
- Nigeria Export Processing Zones Act; and Oil & Gas Export Free Zone Act
- Fiscal Exemptions subject to Tax Filing Compliance Requirements: Section 18(1) of both legislation has been amended in pari materia with the insertion of a new section 18(1)(a): “exemption from taxes, levies, duties and foreign exchange regulations in accordance with section 8 of this Act, always subject to the provisions of the Banks and Other Financial Institutions Act 2020, provided that all companies registered and operating in the Zone shall comply with the provisions of section 55(1) of the (CITA) and render returns in the manner prescribed therein to the (FIRS) and all penalties prescribed in the (CITA) and the (FIRSEA) that may apply in the event of non-compliance with 55(1) CITA shall apply to such companies in the event of failure to comply.”(34)
- Fiscal Responsibility Act and Public Procurement Acts
The amendments seek to improve transparency in order to give more comfort to private sector counterparties in financial and contractual dealings with the FG. How well these will work in practice remains to be seen, but these are welcome steps, that should further the cause of good governance and anti-corruption. Of particular significance are the provisions on open competitive bidding and International Competitive Bidding.(35)
The FA2 2020 Tax Amendments shows the FG’s serious intent of making Nigerian tax law start keeping pace with (global) business realities. Not that there is any choice in this regard anyway, given the significant pressure to raise funds for public spending. The digital economy is getting bigger and more pervasive by the minute, and the FG loses out on the action, at its peril. As noted in this writer’s review of FA1 2020, the annual enactment of FAs will be to the Nigeria public fisc’s advantage, as the FG can make necessary scope, focus and policy adjustments in response to developments in the business universe.
Given the historic bad press on illicit financial flows by NRCs,(36) it is prescient for them to take note of tax regulatory developments in Nigeria with a view to working compliance processes into their Nigerian business strategy, in order to obviate regulatory and reputational risks. The clear message from the FG to NRCs on tax compliance enforcement is that it would no longer be business as usual. On their part, it is expected that the FG and State Governments will ‘up the ante’ in effective delivery of more optimal governance in a manner that reduces the weight of “implicit taxation” on the business community.(37)